True, both the politicians and the Federal Reserve authorities appear to believe that the central bank of the United States runs the economy, and that the economy runs the country. Yes, they act in a manner fully consistent with this belief, whether or not they willingly admit any of this to the public. (As William Greider put it in another book, examining the extent to which the democratic system has been replaced by efforts to bolster speculation and gambling in the secondary markets, Who Will Tell the People: The Betrayal of American Democracy. New York: Simon and Schuster, 1992.) Even discussion in the public arena and in the press and other media over the role of the Federal Reserve and the State itself assumes as a given that 1) the Federal Reserve runs the country in the interests of Wall Street and the financial services industry, and 2) such control is effective and beneficial.
Most discussion and debate on the subject is not concerned with the actual effectiveness or, more critically, the legitimacy of the Federal Reserve's monetary policy. Instead, the debate centers on whether this control is proper on the part of the Federal Reserve, or whether the central bank has effected a usurpation of power(s) that properly belong to the Congress. The basic assumption remains unchanged — that someone (or something) should be in control of the economy, with "control" always defined as imposition or maintenance of desired results. As far as most people are concerned, it's not what the Federal Reserve is doing. The question is whether the Federal Reserve or the State should be the specific institution carrying out the actions intended to impose control on the economy.
Once we understand the proper role of institutions like the State and the Federal Reserve, however, we reach what for many may be a startling conclusion. That is, neither the State nor the Federal Reserve should be doing what they are doing. The whole of today's approach to monetary and fiscal policy is based on an understanding of the human person and the role of the State and its ancillary institutions directly at odds with individual sovereignty and human dignity. This understanding of the State and related institutions is based on a theory of human society peculiar to a profoundly Statist orientation as found in, e.g., Thomas Hobbes's Leviathan. It assumes as a matter of course ultimate State ownership of everything and the effective abolition of private property. ("Propriety Of A Subject Excludes Not The Dominion Of The Soveraign, But Onely Of Another Subject," Leviathan, XXIV.)
This modern concept of the role of the State is irreconcilable with the founding principles espoused by the Founding Fathers of the American Republic, who rejected Hobbes and based their approach to government and the role of the State on Bellarmine, Locke, and Sidney. Understanding this, we can begin to understand the modern financial community's fascination with Walter Bagehot and his analysis of the money markets in Lombard Street (1873) — an analysis based solidly on the tenets of the Currency School, especially as embodied in Sir Robert Peel's Bank Charter Act of 1844. It comes as no surprise to learn that Bagehot thought highly of the totalitarian approach of Hobbes, and detested the United States of America (cf. The English Constitution, 1867).
This situation did not develop overnight. Limiting ourselves to the United States and the Federal Reserve System, the loss of personal liberty and the growth of State power proceeded apace with the economic disenfranchisement of the ordinary citizen. By the beginning of the 20th century, it had become obvious to a significant number of commentators, such as Judge Peter Stenger Grosscup, that the "closing" of the western frontier had also closed off reasonable access to the means of acquiring and possessing private property in the means of production for most people. Since, as Daniel Webster noted, "power naturally and necessarily follows property," most people no longer had the means to acquire power over their own lives, to say nothing of retaining any power they might already have had. Most people were transformed from small owners into wage workers.
Politically and economically, this had been developing since the beginning of the American Civil War. The war itself, while entirely justified, had a number of undesirable, even unintended side effects and consequences. Chief among these was the rapid growth in the power of the federal government over the states. Previously, a commentator such as Alexis de Tocqueville could quite accurately claim that,
In some countries a power exists which, though it is in a degree foreign to the social body, directs it, and forces it to pursue a certain track. In others the ruling force is divided, being partly within and partly without the ranks of the people. But nothing of the kind is to be seen in the United States; there society governs itself for itself. All power centers in its bosom, and scarcely an individual is to be met with who would venture to conceive or, still less, to express the idea of seeking it elsewhere. The nation participates in the making of its laws by the choice of its legislators, and in the execution of them by the choice of the agents of the executive government; it may almost be said to govern itself, so feeble and so restricted is the share left to the administration, so little do the authorities forget their popular origin and the power from which they emanate. The people reign in the American political world as the Deity does in the universe. They are the cause and the aim of all things, everything comes from them, and everything is absorbed in them. ("The Principle of the Sovereignty of the People of America," Democracy in America, Volume I.)Even though Abraham Lincoln declared that the Civil War was fought to preserve "government of the people, by the people, and for the people," the trend established by the growing power of the central government seemed irreversible. The fact that the semi-industrialized North won the war assured that the model for the new America would, despite the continued lip service paid to Jefferson's ideal of the yeoman farmer and an agricultural economy, be predominantly commercial and industrial.
Lincoln's 1862 Homestead Act held back this trend for a generation. There were, however, a number of factors that prevented the Homestead Act from being an effective or permanent counterbalance to the rapid growth of commerce and industry. For example, relatively few people were able to take advantage of the Homestead Act. Nor was the land particularly suited for the uses to which it was generally put. It is almost a cliché to point out that the land was scarcely "free." Not only was it in large measure expropriated from the native inhabitants (an act not excused by the fact that they had expropriated the land from others, and so on, back to the dawn of time), but the Homesteaders had to work the land for five years and meet other criteria before being granted clear title.
Nevertheless, the Homestead Act had an effect all out of proportion to the number of people who were able to take advantage of it. The Act did not affect a majority, but a determinant number of people, helping to reinforce the mythos of America as the land of opportunity. Further, the new markets that opened up as a result of the settlement of the west allowed American industry to grow and prosper without effective competition from the industrial and commercial giants of Europe. In this, the West was, in a sense, returning the favor to the East. The Eastern industries would not have been able to grow as rapidly or on as solid a foundation had not they had the captive market of the West to soak up the flood of new production, while the West could not have been settled effectively nor as quickly had it not had the industrial base of the East on which to draw.
The East, however, had a significant advantage over the West, one inherent in the type of development in which each region specialized. Land, the principal type of productive asset in the West, is strictly limited. Once the free land was taken, there wasn't any more to go around. Further, land is not completely subject to the techniques of pure credit. You cannot have a plan to develop land unless the land already exists. Technology, however, is eminently financeable using techniques of pure credit. The asset does not have to exist at the time it is financed. It is sufficient that there be a sound plan with a definable present value that can be monetized. As Moulton explained,
Even though the flow of funds from individual savings for investment purposes may, for the moment, be inadequate, it is still possible to procure liquid funds with which to buy essential materials and employ the necessary labor.Industrial and commercial assets are thus, to all intents and purposes, limitless. Such assets can be as many and varied as human ingenuity and need can devise. R. Buckminster Fuller's concept of "ephemeralization" — doing more with less — is applicable to a somewhat limited extent to agriculture, although recent developments suggest that it is possible to increase agricultural production at a phenomenal rate, given the right techniques and improved technology. Emphemeralization, however, was a term specifically coined to apply to all forms of technological advancement, with emphasis on industry.
Funds with which to finance new capital formation may be procured from the expansion of commercial bank loans and investments. In fact, new flotations of securities are not uncommonly financed — for considerable periods of time, pending their absorption by ultimate investors — by means of an expansion of commercial bank credit. (The Formation of Capital. Washington, DC: The Brookings Institution, 1935, 104.)
Consequently, in the latter half of the 19th century industry and commerce began to overtake agriculture in importance. Nor was this necessarily a bad thing. The problem was not with technology versus agriculture, per se. This is not changed by the dogmatic belief of the modern "rebel against the future" who fancies him- or herself a "neo-Luddite," and who usually manages to wish-fulfill him- or herself into believing, with varying degrees of paranoia, that he or she does not depend on advancing technology. (See, e.g., Kirkpatrick Sale, Rebels Against the Future, The Luddites and Their War on the Industrial Revolution. Reading, Massachusetts: Addison-Wesley Publishing Company, 1995.) Such people forget that the Luddites were not against technology, whether within or beyond "human scale," whatever that might mean. No, the Luddites were opposed to technology that they did not own, and from which they were shut off from the stream of profits generated by capital and which is due in justice to the owner(s) of the capital.
This was the crux of the matter. It is not technology, but technology that you don't own (and thus do not control) that is "evil." Unfortunately, it seems fixed in the modern human psyche that a single productive asset can only have a single owner. We could demonstrate very easily, although at some length, that this is actually contrary to human nature, but that is not where we are going with this analysis. Suffice it to say that we necessarily agree with Aristotle that, "man is by nature a political animal." (The Politics, I.ii.) It is therefore natural to humanity to organize and work together in free association to achieve both personal and political ends. This is just as de Tocqueville observed as a distinguishing characteristic of American life:
The political associations which exist in the United States are only a single feature in the midst of the immense assemblage of associations in that country. Americans of all ages, all conditions, and all dispositions, constantly form associations. They have not only commercial and manufacturing companies, in which all take part, but associations of a thousand other kinds — religious, moral, serious, futile, extensive, or restricted, enormous or diminutive. The Americans make associations to give entertainments, to found establishments for education, to build inns, to construct churches, to diffuse books, to send missionaries to the antipodes; and in this manner they found hospitals, prisons, and schools. If it be proposed to advance some truth, or to foster some feeling by the encouragement of a great example, they form a society. Wherever, at the head of some new undertaking, you see the government in France, or a man of rank in England, in the United States you will be sure to find an association. I met with several kinds of associations in America, of which I confess I had no previous notion; and I have often admired the extreme skill with which the inhabitants of the United States succeed in proposing a common object to the exertions of a great many men, and in getting them voluntarily to pursue it. I have since traveled over England, whence the Americans have taken some of their laws and many of their customs; and it seemed to me that the principle of association was by no means so constantly or so adroitly used in that country. The English often perform great things singly; whereas the Americans form associations for the smallest undertakings. It is evident that the former people consider association as a powerful means of action, but the latter seem to regard it as the only means they have of acting. (Volume II, Chapter V, "Of The Use Which The Americans Make Of Public Associations In Civil Life," Democracy in America, 1840.)No, there is nothing in the principle of private ownership that mandates a single owner of a single asset or organized business enterprise. On the contrary, it is consistent with essential human nature that people organize, that is, come together in free association, in order to carry out whatever task they have set themselves. When the State or any other institution interferes with this application of the principle of subsidiarity, it not only violates a basic human right, it goes contrary to its own best interests and engages in self-defeating actions.
Nowhere is this more evident than in the way the institutions of the financial markets have concentrated ownership of the means of production. In light of the natural human proclivity to join together in free association, it is a paradox that financial institutions have evolved in such a way as to inhibit or prevent the application of the right of free association to economic life. This is due principally to the erection and maintenance of barriers that have been raised against the great mass of people gaining access to the means of acquiring and possessing private property in the means of production. As Hilaire Belloc pointed out in his analysis of the loss of individual human sovereignty, his 1912 opus The Servile State,
Had property been well distributed, protected by cooperative guilds, fenced round and supported by custom and by the autonomy of great artisan corporations, those accumulations of wealth, necessary for the launching of each new method of production and for each new perfection of it, would have been discovered in the mass of small owners. Their corporations, their little parcels of wealth combined would have furnished the capitalization required for the new process, and men already owners would, as one invention succeeded another, have increased the total wealth of the community without disturbing the balance of distribution. There is no conceivable link in reason or in experience which binds the capitalization of a new process with the idea of a few employing owners and a mass of employed nonowners working at a wage. Such great discoveries coming in a society like that of the thirteenth century would have blest and enriched mankind. Coming upon the diseased moral conditions of the eighteenth century in this country [England], they proved a curse. (Hilaire Belloc, The Servile State. Indianapolis, Indiana: Liberty Fund, Inc., 1977, 100-101.)Unfortunately, almost in the same breath in which he eulogizes widespread direct ownership of the means of production, Belloc makes a fatal assumption that virtually guarantees that what he considers the ideal condition of humanity could never occur in his frame of reference. That is, Belloc assumed, in common with the other adherents (conscious and unconscious) of the Currency School that the financing of capital formation is linked inextricably to existing accumulations of savings. As Keynes quite accurately pointed out consistently with this assumption, "The immense accumulations of fixed capital which, to the great benefit of mankind, were built up during the half century before the war, could never have come about in a Society where wealth was divided equitably." (The Economic Consequences of the Peace, 2.III.)
The assumption that capital formation can only be financed out of existing accumulations of savings has two logical results, either one of them fatal to the dignity of the human person. If we acquiesce in what Louis Kelso and Mortimer Adler called "the slavery of savings (The New Capitalists: A Proposal to Free Economic Growth from the Slavery of Savings. New York: Random House, 1961), we necessarily acquiesce in a state of society characterized by a wealthy elite, whether private (as in capitalism), public (as in socialism), or, increasingly in our day and age, an unworkable combination of capitalism and socialism that Belloc termed "The Servile State," described in his 1912 book with that title.
Whether you call the arrangement capitalism or socialism, the wealthy elite (or the non-owning elite that controls money and credit, cf. Quadragesimo Anno, §§ 105-106), is, by its very nature, the only group with the capacity to accumulate sufficient savings to finance new capital formation. All others must use the income generated by wages or from capital ownership for consumption. Despite all the best intentions in the world, the assumption that capital formation can only be financed out of existing accumulations of savings keeps the great mass of people locked into the condition of non-ownership of the means of production.
The United States in the 19th century thus experienced to an exaggerated degree a startling paradox, at least for a brief but glorious period, still celebrated in the American mythos of the Winning of the West. A severely limited productive asset — land — was available for the taking, without the necessity of first accumulating sufficient savings to acquire and exploit it. At the same time a virtually unlimited asset — the industrial and commercial expansion of the United States — was only open to ownership by a select few with accumulated savings.
Having a limited asset available free to ordinary people, and an unlimited asset available only to an elite at a high cost made for a growing imbalance in economic growth and development. Naturally, this led to the otherwise inexplicable wealth gap that has increasingly afflicted the world. This has caused greater and greater swings in the business cycle that have only been partially assuaged by granting the State and the financial system ever-increasing power in an effort to stave off what the system is arranged to force on humanity.
Once we study the financial history of the United States, however, we realize something shocking. The fixed idea that capital formation proceeds alternately with changes in consumption, that is, that capital formation cannot be financed except by cutting consumption, saving, then investing, is completely wrong. As Harold Moulton demonstrated in The Formation of Capital after investigating the economic development of the United States from 1830 to 1930,
The traditional theory that an expansion of capital construction and consumptive output occur alternately — that the process of capital formation necessarily involves the curtailment of consumption and the transfer of labor and materials from the production of consumption goods to the creation of capital goods — finds no support whatever in the facts of our industrial history. The process involves rather a larger utilization of our productive energy at certain periods when an expansion occurs in the output of both capital and consumption goods and then a smaller utilization of our productive energy when the construction of both capital and consumption goods is declining.Clearly the process of capital formation does not require existing accumulations of savings in order to be effective or even possible. Consequently, laboring under this delusion, the federal government of the United States as well as the Federal Reserve undermine the dignity of the human person by fostering the wealth and power of private and public elites. This is especially reprehensible in that both institutions, within limitations imposed by conditions and certain preconceptions, were established to promote human dignity and individual sovereignty. The end result is a system in which the prevailing belief is that concentrated economic and political power are the only means to ensure that ordinary people can be taken care of, rather than have the capacity, as well as access to the means, to take care of themselves.
We find no support whatever for the view that capital expansion and the extension of the roundabout process of production may be carried on for years at a time when consumption is declining. The growth of capital and the expansion of consumption are virtually concurrent phenomena. (The Formation of Capital, op. cit., 47-48.)
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